Did I agree to that? The impact of governing law and jurisdiction clauses in commercial contracts

November 12, 2012

The boilerplate provisions of commercial contracts tend to be an unloved area. The provisions dealing with how much you will get paid or minimum purchase/sales amounts invariably attract more attention. However, this may result in you losing out or making your own position more difficult.

The starting point is that no one wants to think about the end and in the good times when you’re starting out you don’t think that things could go wrong. But its at exactly these times that you may wish that you had paid more attention to the back and of the contract!

Governing law

In the absence of any specific statement as to the governing law of an agreement, this is likely to be the law most closely connected with the contract, as discussed in this edition of agentlaw news. As a rule of thumb this is most likely to be where the agent is conducting its activities or in the case of a distributorship, where the distributor is making sales to retailers. Generally, the location of the principal is unlikely to be determinative of the governing law, unless it can be argued that the agent is conducting a substantial amount of his activities in that country also.

Does it make a difference?

As seen in the Lawlor case, yes it can. Further, different countries may have mandatory legal provisions which are implied into agreements which may or may not be helpful. Some European countries extend similar protection to distributors to that given to agents. Save for the United Kingdom, the majority of other EU member states have elected for an agent to be paid an indemnity on termination rather than compensation.

Can I get out of it?

Generally under English law where two commercial parties have agreed terms (particularly where they have been legally advised), the Courts will hold them to this agreement. There are some exceptions to this. For example, where a foreign law outside of the EU governs an agreement but the agent is undertaking his activities in the EU if this election excludes the application of the protection for commercial agents then the European Court has held that such an election is invalid.

However, you should not rely upon this. Equally, don’t think that just because you got the contract but didn’t sign it that you will be ok. Invariably this doesn’t work either.

Jurisdiction

Within the EU, where you have no agreement as to which country’s courts will determine disputes, generally the Defendant plays at home. However, if you are performing the contract in an EU member state or your agency is situated in an EU member state then, in the absence of an agreement, you will be able to commence proceedings in those jurisdictions.

On the other hand where there is provision in an agreement that the Courts of a particular EU member state have jurisdiction then, provided that one party is domiciled in a member state, this election can only be overridden in limited circumstances.

Well it’s not a problem I don’t care.

Not all Court systems are the same. For example, Continental Courts have an inquisitorial approach rather than the adversarial approach of the English Courts. Therefore, the Court will generally adopt a wider remit when looking at a claim and consider points not specifically argued by a party. Costs recovery can also be different. The English Courts generally follow the rule that the loser pays the winner. Also, many European systems have tariffs linking recovery to the amount claimed or recovered.

More importantly, you could be playing away from home in a language which is not your native language. There may be substantial time differences between you and the lawyers in the other jurisdiction. Further, some Court systems take longer than others. Generally the English Courts run at around 12-18 months from commencement to trial.

I’ll just commence

If your counterparty files a Defence then you’ve got away with it! But where the jurisdiction clause is clearly enforceable then it is relatively simple to dispute jurisdiction and you are unlikely to succeed in resisting such an application. At that point your claim will have been delayed and you get to pay for this privilege.

Further, the comments above about the Court upholding the decision of the parties in the majority of cases, is equally true in this context.

Arbitration

Sometimes you are not actually agreeing that a Court will have jurisdiction at all. Arbitrations can be attractive for commercial disputes as they are confidential. Equally, there is more choice as to the arbitrator which is selected by the parties (although this must be agreed otherwise the body governing the arbitration, for instance, the ICC will choose the arbitrator). Judges are simply allocated to a case depending on their availability (although there are specialist divisions within the Court system). There are very limited grounds for awards to be appealed and these can be further narrowed depending on the particular arbitration system that applies. Also, the form of an arbitration is less prescribed than a Court process and can be tailored by the parties to their particular dispute.

However, arbitrations can involve higher costs, particularly as you need to effectively pay for your tribunal. Parties generally are expected to make a payment in advance of costs and the arbitration is usually stayed until this payment is received. Equally, agreeing limited grounds for appeal is very useful if you win. But if you lose then this won’t work as well for you!

I’ll just commence in the Courts

Again, unless you can show that the election for arbitration is invalid then the Court is highly likely if the counterparty disputes jurisdiction to decline jurisdiction. A lot of money spent for no real gain.

Summary

The Court is generally very likely to make you honour your choices, even if you didn’t really think about it at the time. If the other party to a dispute has picked a jurisdiction its usually done so for a reason, will be aware of it, and will dig its heels in. In the majority of circumstances, you can end up spending a lot of money for nothing if you ignore the clauses existence and just commence where you want to.

Overall, its better to look what you are agreeing to before you face the consequences. In this respect, while advice has a cost, not taking it can be more costly in the wrong circumstances.